Mellanox Showed Light Trading Action In Key Pullback

Whether you've been reading IBD for 10 months or 10 years, you can always benefit from a simple chart-reading exercise. It will help you judge how a leading stock is acting.

What is this exercise?

Take a weekly chart that shows the price and volume changes. Charts on Investors.com or MarketSmith (an IBD sister firm) make this mental workout easier: Up weeks and their corresponding volume bars are painted blue, down weeks in red.

As you analyze a leader that may be forming a base — or at least pausing for air after making a strong move — study how the stock's price changes from week to week as well as how the volume changes .

If the stock is rising in price, ask yourself: Is volume rising too?

If yes, think this: "Institutions are coveting shares. That's good."

If the stock is falling, ask: "Is volume cooling off?"

If yes, think this: "Selling pressure is low. That's also good."

Also pay attention to weekly volume with respect to its 10-week moving average. If you see numerous weekly price declines but the volume bars stand underneath the moving-average line, think this: "Ah ha. This is evidence that the deep pockets really don't want to sell their shares. That's good."

Mellanox Technologies (NASDAQ:MLNX) was a big flameout in the fourth quarter. Yet its run-up deserves an analysis.

The next week, Mellanox fell 6% in heavy trade, (2)but it was sharply less than the prior week's huge volume. It was a reasonable pullback. Keep watching.

The next week, down 3%, saw even lighter volume. (3)Good.

Look at the two other weekly declines. Volume fell and was also well below average (4)

The chance to get in? The week ended June 8, as Mellanox successfully closed above 60 for the first time in seven weeks.(5)Volume grew. The stock doubled in 14 weeks. A breakout from a cup base occurred in June, too.

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06/01/2015 06:09 PM ET

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Investor’s Business Daily provides exclusive stock lists, investing data, stock market research, education and the latest financial and business news to help investors make more money in the stock market. All of IBD’s products and features are based on the CAN SLIM® Investing System developed by IBD’s Founder William J. O’Neil, who identified the seven common characteristics that winning stocks display before making huge price gains. Each letter of CAN SLIM represents one of those traits.

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